6 tips to get the most from your R&D claim (blog)
Are you tired of hearing the question: “are you aware of Research & Development (R&D) tax credits?”. Yes, me too…
Let's face it- if you’re in the innovation and design space, you’ve probably been asked this question at least once already this month.
But have you ever been asked: “do you know how to maximise your claim?”
Arguably, this is the more important question as many companies don’t exactly know how they can get the most out of their R&D claims. And, as a result, they aren’t receiving the correct amount of money they are entitled to!
From working in the R&D tax space for years now, I’ve learned there are a few tricks to maximising your claims. Here they are below…
Using the right provider
It might sound obvious, but have you ever actually looked at other providers to see if they could enhance your claim experience?
We all know that when you get used to doing something, it becomes easier. However, with ease comes the risk of complacency.
Does this line sound familiar: “just send us a list of your R&D projects you’ve done this year and we’ll talk through them”? Well, this may be the first sign you aren’t getting the most from your provider. This indicates that they are leaving you to guess what activity could be relevant, rather than using their expertise to highlight exactly what you should be claiming for – after all, that is what you’re paying them for!
On the other hand, if your provider is actively trying to shake up the conversation each year, - focusing on new angles and highlighting changes in legislation, government or environment that may impact your claim – this is a good sign the experts know how to build your case to get the largest benefit possible.
If you’re struggling to tell the difference between a good and a bad specialist, check out my other blog on the “Top 5 things my R&D provider should be doing” here.
Failed projects- don’t forget to include them!
If you are attempting to solve a scientific or technological issue in your industry and, for one reason or another, it doesn’t work out – this is still a golden opportunity to look at a claim.
The fact you have actively applied resources, time and money- as well as experimented, trialled and tested - simply shows HMRC that an attempt to advance something has been made. Ultimately, that is what you are being rewarded for, not if it’s successful.
To ensure you’re including all the relevant projects to maximise your claim, my advice would be to make a list of all your activity throughout the year (small and large) and let your specialist educate you on which ones would qualify.
Grant funding and claiming
In case you have been told otherwise, let me clear this up once and for all: You can be awarded grant funding AND still make an R&D claim.
In fact, R&D tax relief and grant funding are actually complementary to one another. You are constantly trying to make the world a better place by carrying out R&D projects and guess what? The Government want to help you pay for it.
However, if your business has gone down this route, the difference you may face is the type of R&D tax scheme you can claim under. Depending on if the grant is state aid or not will determine if you will then fall into the SME scheme or RDEC.
The RDEC scheme requires alternative calculations and therefore a different amount that can be claimed. However, with the new changes coming into play from April 2023, now is the best time to be awarded grant funding and receive an RDEC R&D tax relief benefit. This is because there has been a significant increase in the benefit amount companies can now claim.
If you want an idea of the other changes that will impact an R&D claim post-April 2023, check out my “April 2023 changes” playlist here.
Understanding cost categories:
Many businesses downplay their R&D costs in the fear of HMRC knocking on the door and demanding their money back.
However, it is vital that you understand the qualifying cost categories that are assessed so you can understand ways to maximise them. The activities are as followed:
- People costs
This is typically the largest part of any claim. It includes percentages of staff salaries, subcontractors and externally provided workers. Note: HMRC will only allow you to use up to 65% of a subcontractor cost within your claim.
- Materials wasted
This includes all the bits and bobs that you physically use throughout your R&D journey but for whatever reason cannot be used in the final product so is either scrapped, binned or deemed “unfit to sell on”.
- Utilities
This includes a percentage of your consumables used towards the running costs of your projects. I.e the electricity it costs to run your factory/power plant/science lab
- Software
This includes software licenses you own that you use specifically for your R&D projects. It may be that you pay for an annual license for CAD. 50% of the subscription costs go to business as usual and 50% go to R&D. It’s worth noting that HMRC is changing this category for tax years beginning on or after 1st April 2023, and they are now allowing data sets and cloud computing costs to also be included (only if the costs relate directly to the R&D project).
- Travel Costs
Don’t ask me why but for some reason HMRC giveth with one hand and taketh away with the other on this category. Ultimately, if you are paying for travel costs specifically for R&D projects i.e. you’re travelling to a manufacturing plant a lot or doing research in another city, you can claim these expenses back.
The issue? you can only do it if you pay for it yourself and then expense it back through the company. If the company pays for it via a company card/mileage card then unfortunately you cannot assign these costs to your claim. This can include things like hotel stays/travel/food subsistence etc.
- Research & Development Allowances (RDA)
100% relief for capital expenditure on machinery and even buildings. This comes into play more when you have had to adapt your commercial property to coexist with your R&D projects- ask your provider more about this if you feel you qualify.
Exploring your eligibility for a Capital Allowances claim
If you own a commercial property, you may be entitled to receive money back for its embedded items, such as heating, lighting, security systems – the list goes on. This tax relief is called Capital Allowances (CA)
However, doing a stand-alone Capital Allowances claim is an issue if you’re a loss-making business.
Typically, if you want to make a Capital Allowances claim, the only way you get to actually enjoy any benefit is if your company is in a profitable position. This is different to R&D claims where you can be in a loss-making position and still get to enjoy a benefit.
But, if you are running an R&D claim (within your loss-making business), by including a Capital Allowances claim, you now can enhance your “losses”. As a result, you get to enjoy a bigger R&D benefit, as well as a continued CA benefit when you make a profit.
If you didn’t know this, you’re not alone! It is something that companies miss out on all the time, and it simply comes down to a lack of knowledge. My advice - don’t try to do the sums yourself! If this seems relevant, speak to a specialist.
Create a project pipeline
Doing your first R&D claim can be overwhelming. You are essentially letting a company paint your innovation picture to HMRC in the hope that it's justifiable enough to be rewarded with a financial benefit. But believe it or not, each consecutive year gets easier.
My best advice to maximise these annual conversations is to keep a log of project titles, activities and spend throughout the year. Doing this helps you keep track of those all-important R&D elements to ensure nothing is missed when you come to submitting your claim. It also helps you pipeline your future projects as you can understand very quickly where most of your R&D time is going.
Something you will want to be aware of is all R&D submissions from 1st August 2023 will require the cost categories to be broken down by project, not by full claim. Therefore it would be in a claimants best interest to get into the habit of breaking down these costs accurately now, so they make their claim experience less work.
Look to the experts
Hopefully, the above tips should help you feel a little more confident about how to get the most out of your claim. However, R&D tax relief can be extremely complicated, and you’re not expected to know it all – after all, that’s what you pay the experts for! If in doubt, it is always worth speaking to your specialist of choice to help understand where you should be claiming and how you can get the largest benefit possible.
If you’d like to find out any more information on how you can maximise claims, contact me on karen@innovationinsights.uk
Thanks for Reading!